Brad Delong relays a benefit of NGDP level target that I have tried to layout, though less eloquently:

At lunch today Christina Romer reminded me of–or rather drove into my thick head a point that I had missed during the seminar, even though he was standing only six feet in front of me at the time–Ivan Werning’s point that level nominal GDP targeting is a good policy in a liquidity trap not just or not primarily because it promises future inflation but also and (for his parameter values) primarily because it promises a future boom.

The hard thing for so many economists to remember – because they have been trained to forget – is that the real world is nominal.

I think this is important and so I want to spell it out in careful statements

1) At any period in time your command over goods and services is determined by your access to liquid assets. That is, to say “how much money you have.”


2) The nominal interest rate measures your ability to transfer command over goods and services into the future.


3) Only by through investment – which entails risk – can you possibly transfer command over goods and services into the future at a rate other than the nominal interest rate.


These are the only relevant facts available to economic agents: households, businesses, governments, etc.

The real interest rate, the inflation rate, the real growth rate, the real return on capital. These are all theoretical constructs. They can help clarify thinking on some matters, but can get folks tangled in knots when thinking about otherwise simple propositions.


How does that work here?


Because if the Fed pushes down the nominal interest rate and up the nominal return on investment this encourages investment.

If I say that look, by holding cash you can only transfer command over goods and services into the future at a low rate, however I promise that at some point there will be an enormous volume of sales for your business, what are you going to want to do?

You want to take that basically free cash and put into work getting ready to catch those big sales.

Indeed, this is a difficult to lose proposition. Either sales go up or the carrying cost of cash stays low. Either way you are in the clear.

The only way this whole thing goes bad is by a sharp enough rise in raw materials cost. This can happen. It has happened with oil. The question is, how likely is it to happen?

We can talk through this but the net effect from the Fed is almost certain to be weaker than the increase in sales. Something else could happen – a war in the Middle East for example – to cause raw material prices to rise. However, this is not Fed induced.


More importantly, from my view of the world.  The promise of cheap money or big spending makes lending a no lose proposition.